Anglo American posts drop in earnings, but sees rise in profits

By
Geoff Candy
17 February 2014

Editorial

Anglo American CEO, Mark Cutifani is encouraged by the group's performance over the twelve months to end December 2013 but is not yet happy with it.

For the year, the transnational miner announced a , loss attributable to equity shareholders of $961 million, while underlying earnings fell 7% to $2.7bn. However, group underlying profit rose 6% to $6.6bn.

$1.9bn in impairments didn't help. Neither did the general metal price weakness over the year, nor a poor performance by the group's nickel division and the ongoing issues at the group's Sishen iron ore mine. But, things weren't all bad for Anglo American during the year.

As Cutifani explains in a video interview accompanying the results, ""I am encouraged by the fact that we have made many improvements over the course of the year particularly in copper. The fact is, we got a 6% improvement in underlying operating profit, that's encouraging, particularly when one compares commodity prices year-to-year, that is a good result. But, we are still not where we need to be, we are at about 11% return on capital employed, we need to be north of 15%."

This increase in underlying operating profit it said was owing to, "De Beers contributing for a full year as a subsidiary, improved sales at both Copper and Platinum and the weakening of the South African rand, partially offset by lower prices across the majority of our commodities."

Looking at the various business units, underlying operating profits rose 4% to $3.12bn at iron ore and manganese, Copper delivered a similar performance to 2012, with an underlying operating profit of $1.7bn, as a result, Anglo said, "of lower realised sales prices, offset by increased production and sales volumes.

The weaker rand came to the aid of both the platinum and diamond divisions, with Anglo American Platinum producing an underlying operating profit of $464 million, up from a loss of $120m in 2012, while diamonds were definitely the jewel in the crown, with a 112% increase in profits to $1bn, a 112% increase, "reflecting the group’s increased shareholding, together with improved prices, largely owing to the product mix, and a weaker rand."

On the downside, metallurgical coal saw underlying operating profit fall 89% to $46m, while thermal coal profits fell 32% to $541m, and niobium and phosphates business produced a profit of $150m, 11% lower than the previous comparable period, largely as a result of lower realised prices.

The other headache was nickel, which reported an underlying operating loss of $44 million, a $70 million decrease, while its other mining and Industrial business lost $13m over the period, a $181 million decrease, "owing to a nil contribution from Scaw South Africa (which was divested in November 2012), a weaker market at the Lafarge Tarmac joint venture, and the Amapá operation not benefiting from the reversal of penalty provisions, as it had in 2012."

The group also announced $1.9bn in impairments. Principally, the group said, "in relation to Barro Alto ($0.7bn), Platinum portfolio review ($0.2bn), Michiquillay ($0.3bn) and Foxleigh ($0.2bn)". While he says that is now largely under control, Cutifani admits that it is always a concern when shareholders are impacted in such a manner.

Focusing on 2014, the three critical issues, Cutifani says, are: the continuing restructuring of the platinum business and managing all the various stakeholder relationships, particularly its relationship with its employees; ensuring that Minas Rio succeeds in landing its first ore on ship and, finally, ensuring that it puts the disappointment of Sishen's performance during the year behind it.

"We have gone through a complete redesign and so making sure we change the way we mine the operation and implement that redesign is absolutely critical, especially going into 2015," Cutifani says.

Looking further out, Cutifani adds, "While I expect headwinds to continue in 2014 as we reset the business, the benefits of much-improved operational processes and performance will flow through largely in 2015 and 2016... The world economy should also strengthen in 2014 and 2015 as we continue to emerge from the challengesof the global financial crisis. China should continue to grow by around 7% and the diminishing effects of fiscal tightening should support a firmer recovery in the US and beyond.”

That being said, as JP Morgan points out , in its note on the results, while the group produced better than expected full year earning numbers, JP Morgan's "investment preference among the diversifieds is based on ability to generate FCF and return capital and FY’13results reinforce our belief AAL is less well positioned to meet this criteria as cash flow generation and $10.7bn net debt was weaker than the JPM estimate."

And, while it acknowledges "the attraction of a 2016 targeted operational turnaround" it currently doesn't believe the current share price adequately reflects the execution risk.

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